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The sector vital to Australia's economic transition just contracted

Photo: Shutterstock

Australia’s vast services sector ended 2015 on a disappointing note with activity levels contracting at the fastest pace seen in over a year.

That’s the unwelcome news to come from the latest Ai Group performance of services index (PSI) with the gauge slipping 1.9 points to 46.3 in December.

Like all PMI surveys, the PSI is a diffusion index that measures changes in activity levels from one month to the next. A reading of 50 is deemed neutral, or indicative of no change in activity levels. A sub-50 figure indicates that activity levels are contracting while a reading above 50 indicates that activity is accelerating.

At 46.3, activity levels have now contracted over the past three months.

The table below, supplied by the Ai Group, shows the internal breakdown of the components that make up the final headline index.

Worryingly, the subindex measuring sales plummeted 6.2 points to 43.0, well below its 12 month average of 52.2, while new orders – a forward looking indicator on future levels of activity – slid 1.8 points to 45.5.

Survey respondents indicated that consumer spending was selective in December, with early retail discounting before Christmas biting into competitor sales.

Despite a small uptick in the employment index to 48.6, all components bar stocks (inventories) came in below the 50 level separating expansion from contraction.

Adding to the downbeat headline figure, just two of the nine services sub-sectors grew in December. Only health and community services, the sector where a significant proportion of recent job growth has been centred, and personal and recreational services saw activity levels expand from a month earlier.

Understandably, Ai Group Chief Executive Innes Willox believes the weak headline reading, along the decline in new orders, offers little encouragement for activity in the months ahead.

Australia’s services sector saw a disappointing end to 2015 as sales and employment both fell in December and as the headline Australian PSI indicated contractions in the sector for each of the last three months. Health and community services and personal and recreational services grew and the hospitality sub-sector maintained its levels of activity while all other sub-sectors contracted in December. Businesses reported an early onset of price discounting as competitors tried, largely without success, to maintain sales volumes. With new orders for services continuing a run of falls that began in September, the sector’s outlook for the early months of 2016 is not encouraging.

While there are well known question marks over the relationship that exists between the PSI survey and Australia’s actual economic performance, the sharp decline registered in December is an unwelcome development nonetheless.

Amidst weakness in other parts of the economy, many were looking to the services sector to help power economic growth in the years ahead.

It’s the largest sector in the economy and, as a consequence, is also the largest employer. Should it stutter, it suggests that Australia’s economic transformation may be anything but smooth in the period ahead.

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